Therefore, you want to find the best rental property deals and invest your hard-earned money.
This is a frequently asked question from our readers.
What about the possibility of earning good shekels by becoming a mortgage banker rather than a landlord? Besides private mortgage loans or so-called “hard money loans”, you could find a 10% rate of return over a three-year period. Is there a place where I can do it?
Hard money financing is more like a direct rental investment. It's worth considering. why? Some property owners will pay more because for some reason they don't qualify for cheaper institutional loans from commercial banks, Fannie Bank, Freddie Bank, etc.
Hard money loans are typically arranged and financed for one- to four-unit complexes, small apartment buildings, and shopping malls. An appraisal may be required, and title insurance is always required to protect everyone involved.
“Right now, market interest rates are around 10% to 11%,” said Ken Thayer, president of Newport Beach-based Residential First Capital. “Up to 10 people can invest in one split note. As an example, 10 people each contributed $100,000 to a $1 million bill.”
Thayer, who has been in the financing business since 1986, said 90% of his deals are for one to four units. Half of the transactions are in seconds, and the average loan size is $300,000 or $600,000 for a first mortgage. Any contract typically stays under $3.5 million.
A private mortgage, known as a deed of trust in California, can be in first, second, or third place as a lien against real property.
Thayer's investment customers pay 1.25% of the balance to repay the note. Fees for services like Thayer's are high around the world. Your servicer's rates may be lower or significantly lower. And of course, some servicers charge fees of 1.25% or more. For example, if the note to the property owner is 11% and the servicer's fee is 1%, the investor will receive a net return of 10%, excluding ordinary income taxes.
Suppose five investors invest $200,000 in a $1 million hard money loan. If the note interest rate is 10% and Thayer charges each investor a 1.25% service fee, each investor will earn 8.75%. Or look at it like this: $200,000 x 8.75% = $17,500 divided by 12 months, giving each investor $1,458.33 per month in interest-only payments.
Thayer offers $110 million in hard money loans, but believes real estate rentals are still more lucrative. “I would have made more money if I had worked hard in real estate,” he told me.
Thayer makes a good point. California homes are still appreciating 25% to 35% despite the softening in prices, which for long-term investors outweighs most hard money gains.
My advice: Your best defense against a borrower willing to pay more money just because you can't get a bank loan is the remaining equity in your property. With 50% equity remaining, investors are relatively safe even if the borrower defaults and property values continue to decline. No one wants to foreclose, but it does provide some protection.
In the current market, I think it's better to invest in a hard money loan than an actual rental property for the following reasons:
1) Real estate values are declining. (No one wants to catch a falling knife)
2) Currently, maintenance costs (principal, interest, taxes, insurance, and other mortgage payments) are high.
3) Huge utility costs put pressure on profits
4) California rent relief is still lurking in these post-pandemic days.
5) There is talk of national rent “protection”.
Let's get back to talking about money. What about the sustainability of the high 10% returns you get on hard money investments? Could you earn even higher yields if inflation rises further?
Conventional mortgage rates hit an all-time low of 2.65% in January 2021, according to Freddie Mac. Although interest rates have improved significantly over the past few months, they are still very high at 6.09% as of February 2nd.
The prime rate hit its lowest level of 3.25% in March 2020 (December 2008 was the last time the prime rate was this low). On February 1st, Wall Street's prime rate rose to 7.75%. It hasn't been that high since September 2007. It is also certain that short-term borrowing costs will rise further in the near term.
According to attorney Dennis Doss of the Doss Law Firm, a private money mortgage expert, a typical private money loan lasts two to three years and ends with the property owner making a large payment. There is.
As Thayer explained, the surge in Wall Street capital due to COVID-19 has provided a cheaper alternative, perhaps in the 9% range, for borrowers in need of hard money. However, the train has left the station. The price has returned to normal.
So how much more can I get?
“There is no maximum interest rate (legal maximum) for intermediary loans,'' Doss said. “The rate depends on the market.”
So why not stick to buying rental properties? While private mortgages require little or no effort on the part of the investor, managing rental properties requires a lot of effort.
How do I know who to invest my money with? Scammers are everywhere.
“Consumers who want to be sure they are dealing with a good private money broker should check the broker's license, consult references, read online reviews, and check with the Better Business Bureau, Chamber of Commerce, and other community groups. ,” said Rick Lopez, deputy commissioner of the California Department of Real Estate.
Mr. Doss told investors that they need to understand how aggressive private money brokers are in finding and evaluating properties to issue loans to. Request a copy of your broker's most recent business activity report. Look at the delinquency rate of borrowers, and ideally “it should be below 5% to 7% (more than 60 to 90 days delinquent),” he said.
California law requires brokers to evaluate an investor's suitability to invest in a trust deed based on a questionnaire (California Department of Real Estate Form RE870). Find out an investor's net worth, income, and investment background. The amount invested must not exceed 10% of the investor's net worth minus 10% of his home, furniture, automobiles, or income.
Freddie Mac interest rate news
The average 30-year fixed interest rate was 6.09%, down 4 basis points from the previous week. The 15-year fixed interest rate averaged 5.14%, down 3 basis points from last week.
The Mortgage Bankers Association reported that mortgage applications were down 9% from last week.
Bottom line: Assuming a borrower receives an average 30-year fixed rate on a conforming $726,200 loan, last year's payment was $1,115 less than this week's payment of $4,396.
What I'm looking at: Qualified local borrowers can get the following fixed rate mortgages for one point: 4.875% for 30 year FHA, 4.5% for 15 year conventional, and 4.5% for 30 year conventional. 5.25%, 4.99% ($726,201 – $1,089,300) for traditional 15-year balances, 5.625% for traditional 30-year balances, and 6.125% for jumbo 30-year fixed balances.
Note: 30-year FHA-compliant loans are limited to $644,000 in the Inland Empire and $726,200 in Los Angeles and Orange Counties.
This week's featured loan program: 30-year VA fixed rate of 4.875%, cost 1 point.
Jeff Laserson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.
